Microsoft doubles down on 2-in-1, enterprise-first Surface strategy

Microsoft has doubled down on the strategy to push its in-house Surface as a 2-in-1 device that does duty as laptop or tablet, serving not consumers but business customers.

Rather than dive into the consumer market with a smaller-screen Surface, as most expected, Microsoft instead rolled out the Surface Pro 3, a third-generation convertible, or 2-in-1, that starts as a tablet, but with the addition of an optional keyboard, ends as a lightweight notebook.

That strategy, which was muddied when the company first launched the Surface line in 2012 -- Microsoft actually debuted its pure-tablet play, the Surface RT, first -- has been clarified. Today, Microsoft aimed the Surface squarely -- almost exclusively -- at commercial customers, those in business or heavily tilted toward productivity.

The laptop mode of the Surface Pro 3 got the bulk of the attention from Microsoft's Panos Panay, the executive who leads the Surface team. "You've been told to buy a tablet, but you know you need a laptop," said Panay. "This is the tablet that can replace your laptop."

"I saw today as a realization that they can't be a head-to-head competitor with all the tablets out there," said Jack Gold, principal analyst at J. Gold Associates. "In that sense, they're focusing on a winning strategy. Who is my installed base, how do I satisfy that installed base, and how do I do that in a way that doesn't conflict with my OEM partners?"

That left Microsoft fixated on the enterprise, the company's specialty. "Instead, it has concentrated on its key strength: business users who look at tablets as extensions and or replacements for full laptop capability," said Gold.

The Surface Pro 3, as Microsoft dubbed the new 12-in. tablets, will start at $799 for a model with 64GB of storage space, 4GB of system RAM, and an Intel Core i3 processor, then slide up the price scale through $999, $1,299 and $1,549 before hitting $1,949, with the higher-priced models boasting more storage, more RAM and faster processors.

But to be what Microsoft says the Surface Pro 3 is, customers will have to fork over another $130 for a keyboard cover, which still is not packaged with the tablet.

"I think they're finessing what they've done before, evolving their tablet strategy," Carolina Milanesi, chief of research at Kantar WorldPanel Comtech, said when asked for her take on today's unveiling. "But it also goes back to where they can make money. Surface was never intended to be a mass market device."

True. By skewing toward corporate, Microsoft avoids the price war in the consumer tablet market, and according to the company, also avoids Apple's iPad, which it dismissed as a productivity platform in several subtle -- and some not so subtle -- ways.

Microsoft today pitched the new Surface Pro 3 as a notebook that just happens to be a tablet. But customers still have to fork over more for the keyboard, pricing the least-expensive model at $929. (Image: Microsoft.)

That's smart, said Gold, who pointed out that the Surface Pro 3's high prices -- stratospheric for the tablet market, high, too, for the Windows notebook market -- matter less to corporate customers, who are interested in how a device can boost productivity, not its base price.

Microsoft has had a profit problem since the Surface introduction, losing at least $1.2 billion in the last year alone. Focusing on business, where higher margins don't automatically preclude sales, was the right move.

"Microsoft can win, and it doesn't need to sell tens of millions of this device to be successful," argued Gold. "Rather, it can sell a modest number, perhaps two to three million, and still claim major success in validating the viability of the Windows tablet market."

Or at least the Windows 2-in-1 market.

Not everyone interpreted today's roll-out as a Microsoft pour-on-the-coals moment that simply sharpened its original strategy.

"I think this was a fundamental change in strategy," countered Patrick Moorhead, principal analyst at Moor Insights & Strategy. "Rather than being the ultimate productivity and creative consumption device, [the Surface Pro 3] is only a productivity device."

But even as he called Microsoft's original concept a failure, Moorhead joined the others in praising today's ploy. "Previously, [the Surfaces] weren't optimized for anybody, previously they tried to take on Apple with a frontal assault. That wasn't smart. Today they took a hard look in the mirror and asked 'What are we good at, what do people think we're good at. That was smart."

In general, the analysts were bullish on the restart.

"The enterprise is where they fit," Milanesi said of Microsoft. "And maybe it's best to think about [the Surface Pro 3] as where the next replacement cycle for PCs will go, and how something like it gives companies an upgrade path for their [current] laptops and PCs."

"I was surprised, actually," said Gold. "I was expecting to hear how they were trying to compete [in the tablet market], rather than how they were going to differentiate it within the notebook market. But notebooks are at the heart of the enterprise, so I'm reasonably bullish."

"What's clear is that Microsoft is in it for the long haul," Moorhead said, noting that the event began with CEO Satya Nadella on the small stage. "That was more than just getting the new CEO on the road," Moorhead added. "That showed that this was a very important launch to Microsoft, one that was important to get right."

"I expect this device to be successful for Microsoft, and to show that the new focus of Microsoft on markets where it can clearly differentiate and leverage its strengths can indeed pay dividends," said Gold. "Time will tell if enterprises and users see it the same way."

Copyright 2015 IDG Communications. ABN 14 001 592 650. All rights reserved.
Reproduction in whole or in part in any form or medium without express written permission of IDG Communications is prohibited.